If you’re hoping to take advantage of Refund Anticipation Loans (RALs) and related products during this tax season, you’re going to have to look pretty hard. Many third party preparers will not be offering those products this year, citing financial difficulties with underwriters.
Some of the financial difficulties stem from the economy. RALs (and similar products) are essentially loans secured by the promise of a tax refund. Fees for tax preparation products and tax preparation services are generally subtracted from the refund amount and the balance issued to the consumer in some form (check, debit card, direct deposit, etc.) in advance of the taxpayer’s actual refund less interest and loan fees.
In a tough economy, banks and other lenders are growing wary of offering consumer loans. Complicating factors, the IRS is sticking to their guns in a statement made back in August to no longer provide tax preparers, banks and lenders with the “debt indicator” that lenders use to determine eligibility for RALs. The debt indicator is an electronic acknowledgment to tax preparers advising whether any part of a taxpayer’s refund has been earmarked for offset due to outstanding tax debts or priority obligations such as unpaid child support or delinquent student loans. In previous years, the IRS provided this information, free of charge, to third party preparers, who then made the decision to offer a variety of loan products depending on the answer. Beginning in 2011, that information will no longer be provided to third parties, prompting many lenders to pull out of the business altogether.
One such lender, HSBC, pulled out of a deal to provide loans to H&R Block, the nation’s leading tax provider. In response, H&R Block took the lender to court and the two eventually reached a settlement for the upcoming tax season where the tax prep service agreed to cover any defaults on loans made by HSBC.
Since then, HSBC has changed its mind. Over the Christmas holiday, HSBC’s banking supervisory agency, the Office of the Comptroller of the Currency, advised HSBC to stop offering these loan products to H&R Block. HSBC promptly put an immediate end to their contract with H&R Block.
H&R Block has since expressed disappointment at HSBC’s actions but indicated that they have “several other financial products available and under development.” There’s no word yet on what those products will be.
Jackson-Hewitt, the nation’s number two tax preparer, has indicated that it will make RALs and related products available to taxpayers in 2011. The tax prep company relies on Republic Bank & Trust Co. to fund those loans.